(Bloomberg) — Best Buy Co. predicted a decline in its operating margins amid pressure from rising costs and investments in a new membership program that the electronics retailer expects will drive “meaningful growth” over the long term.
Operating profit excluding some items will amount to only 5.4% of sales in the current fiscal year, down from 6% in the year just ended, the electronics retailer said in a statement Thursday as it reported earnings.
The forecast trailed the 5.7% average of analyst estimates compiled by Bloomberg.
The outlook points to a challenging year for Best Buy as it contends with soaring inflation and the end of a demand surge for its gadgets and services that had been sparked by the coronavirus pandemic.
By fiscal year 2025, however, the company sees strong revenue growth and operating margin expansion “well beyond” what it reported last year.
“We expect sales growth and earnings to look different” this year, Chief Financial Officer Matt Bilunas said in the statement.
He said the two biggest variables in this year’s forecast “are the short-term industry decline as we lap high growth and government stimulus, and the investment in our new membership program.”
The shares rose 7.9% in early New York trading at 8:08 a.m.
In the 12 months through Wednesday, Best Buy shares had fallen 1.6% compared with a 7.5% gain in an S&P 500 index of consumer discretionary companies. Best Buy’s previous earnings report, in November 2021, had prompted the biggest rout in the shares since the start of the pandemic.
“We remain hold-rated but the stock seems fairly washed out at current levels, likely reducing incremental downside potential,” Truist Securities analyst Scot Ciccarelli wrote in a note to clients Thursday.
Bilunas, Chief Executive Officer Corie Barry and other company leaders are scheduled to present more detail on the long-term goals in presentations this morning.
Adjusted earnings fell to $2.73 a share in the fourth quarter, Best Buy said.
Analysts had been expecting $2.72. Sales slipped 3.4% to $16.4 billion. Analysts had predicted $16.6 billion.
During the current fiscal year, which ends in early 2023, adjusted earnings will be no more than $9.15 a share, the company said.
That compared with the $9.36 average of analyst estimates.
Best Buy also unveiled a long-term outlook, predicting an operating margin of 6.3% to 6.8% in fiscal year 2025 and revenue of as much as $56.5 billion.
Totaltech, the company’s membership program, will help drive “meaningful growth,” as will Best Buy Health, an initiative to provide technologies to assist in the care of older people, Bilunas said.
(Updates with analyst comment in sixth paragraph.)
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